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All You Need to Know About China in One Chart

A picture says a thousand words. In our case it’s a chart, but I nit-pick.

If you need any more evidence that China is a ticking bomb, just look at the chart below (and show your friends and colleagues as well)…

What you’re looking at here is a graphic representation of what happens after credit grows rapidly for five to six years. And it doesn’t just happen occasionally. It happens EVERY time. Nor does it only happen in some countries and not others. It happens to EVERY one.

Credit peaks and a debt crisis follows.

We’ve seen it in the U.S., in Europe, in South Korea… and now we’re seeing it in China.

China has become a bubble mutant, with bubbles forming inside others and on top of others. And the fat lady’s about to burst right out of her too-tight, sequined opera dress.

We started to warn about the great bubble in China years ago after seeing the research of Jim Chanos and Pivot Capital Management. They highlighted the massive ghost cities like Ordos and showed clear statistics as evidence that China’s economy was largely being driven by massive overbuilding and exports and not as much by sustainable consumer demand.

Now a great new report written by Edward Chancellor and Mike Monelly of GDO’s asset allocation team, called “Feeding the Dragon,” shows that there are signs of yet another bubble in China.

That is, credit growth has again reached extreme levels in government and the private sector. There is high leverage from off-balance sheet government debt. And the shadow banking system looks more out-of-control, supporting endless local crony-government and private investments that are not sound or sustainable.

On top of that, banks are losing deposits to private wealth management products a lot like the mortgage-backed securities that offer higher returns while looking “safe” and guaranteed implicitly by the government. Yep. Just like the ones that helped create the subprime crisis and Lehman Brothers collapse in 2008 here at home.

Of course, many analysts, especially in China, argue there is no cause for alarm because China’s total private debt is only 200% of GDP and the government’s debt is only 30% of GDP.

Why do these people insist on treating us like idiots?!

What about all the off-balance sheet government debt? Aha! When you factor that in it brings total government debt closer to 100% of GDP… AND rising. Add that to the private debt, it means that China’s real total debt is more like 300% of GDP. That is significantly higher than any emerging country before it.

In fact, this is particularly extreme for an emerging country whose businesses and citizens are much less wealthy and credit worthy than those of other emerging countries.

Oh, but wait. It gets worse.

Add to that, the fact that China’s workforce recently shrank a little for the first time in history. Our longer-term demographic analysis shows that China’s workforce will plateau from around 2015 to 2025 and then decline rapidly (just like Japan) for decades to follow. That’s without a major financial crisis ahead that would reduce it more and sooner.

The harsh truth is that China is overbuilding for a future that is not likely to materialize, especially if our scenario for a world slowdown occurs more into 2020 – 2022 or so.

China’s bubble is likely to be the last to burst, but burst it will over the next decade. And when it does, it will bring commodity prices down with it… those emerging countries whose stock markets revolve around their strongest resource export industries will suffer. Even developed countries like Canada, Australia and New Zealand will take a hard knock in the years ahead.

Do yourself, your investments, your business and your finances a favor. Don’t rely on China’s projected 7.5% growth to last for long… or to save the world economy. Harry

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.